ASSUMPTION COLLEGE OF NABUNTURAN

Nabunturan, Compostela Valley Province

ACCOUNTING 10A
MIDTERM EXAMINATION
October 22, 2020

Name: ______________________________________ Score: _________________________

TEST I. IDENTIFICATION

_________________ 1. The parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement.

_________________ 2. A method of recognizing profit from installment sales where cash collections is regarded as
a partial recovery of cost and a partial realization of profit in the same proportion that these two elements are
present in the original selling price.

_________________ 3. These are construction projects that extend thru more than one accounting period.

_________________ 4. The costs that relate directly to the specific contract; are attributable to contract activity in
general and can be allocated to the contract; and are specifically chargeable to the customer under the terms
of the contract.

_________________ 5. These are cost incurred before the contract has been entered into, with the expectation
that the contract will be accepted and these costs will thereby be recovered through billings.

_________________ 6. These are the anticipated cost of materials, labor, subcontracting costs, and indirect cost
(overhead) required to complete a project at a scheduled time.

_________________ 7. Is a means of distributing goods and services. A franchise generally involves the grant from
one party (franchisor) to another party (franchisee), the right to sell the granting party’s goods or services.

_________________ 8. The _______________ contributes his trade name, products, company’s reputation and
trademarks. He also imparts his expertise and on continuing basis provides guidance and duties in the manner in
which the franchisee must operate his establishment.

_________________ 9. Parties that have joint control of the arrangement have right to the net assets of the
arrangement.

_________________ 10. Represents initial payment for establishing the franchise agreement, and for providing
certain initial services associated with the agreement.

TEST II. PROBLEM SOLVING. Show your solution.

1. Motortrade of Nabunturan which is financed by the bank of Makati sells motorcycles on a three year
installment sales contract. On December 31, 2020, the last day of its first year of operation, the results of
operations before adjustment are summarized below:
Sales P 800,000
Cost of installments sales 400,000
Operating Expenses 50,000

The total collections for the year amounted to P 400,000 which includes P 70,000 of interest income.
 a. How much is the gross profit rate?
b. The realized gross profit for the year is-
c. What is the balance of the deferred gross profit as of December 31, 2020?
d. The installment contracts receivable balance at year end is-
e. How much is the net income or loss for the year?
2. Filstate Company is a real estate developer that began operations on January 2, 2020. Filstate
approximately uses the installment method of revenue recognition. Filstate sales are made on the basis
of 10% downpayment, with the balance payable over 30 years. Filstate gross profit percentage is 30%.
Relevant information for Filstate first year of operations is as follows:
Sales P 16,000,000
Cash Collections 2,020,000
The realized gross profit and deferred gross profit at December 31, 2020 are:
3. Tayag Corp., which began operations in 2020, accounts for revenues using the installment method.
Tayag’s sales and collections for the year were P 70,000 and P 45,000, respectively. Uncollectible accounts
receivable of P 5,000 were written off during 2020. Tayag gross profit rate is 30%. On December 31, 2020,
what amount should Tayag report as deferred revenue?
4. Bally Company, which began operations on January 2, 2020 approximately, uses the installment method
of revenue recognition. The following data pertains to the company’s operations for 2020:
Installment Sales P 1,000,000
Cost of Installment Sales 600,000
Collections on Installment Sales 180,000
Installment accounts receivable written off 30,000
What is the balance of Deferred Gross Profit account- 2020 on December 31, 2020?
5. Mango Company, which sells appliances started operations on January 10, 2020 operates on a calendar
year basis, and uses the installment method of revenue recognition. The following data were taken from
the 2020 and 2021 accounting records:

2020 2021
Installment Sales 500,000 600,000
Gross Profit Rates based on cost 25% 20%
Cash Collections on 2017 sales 120,000 200,000
Cash Collections on 2018 sales 250,000
What is the amount of realized gross profit to be recognized on December 31, 2021?

6. The following data pertain to installment sales of Ruth Ann’s store.

i. Down payment, 30%
ii. Installment sales, P545, 000 in 2019, P 785,000 in 2020, and P 968,000 in 2021.
iii. Mark-up on cost, 30%
iv. Collections after down payment are: 30% during year of sale, 45% during the year after
and 25% on the third year.

The installment Accounts receivable at the end of 2021 is:

7. The following data pertains to Bell Co’s construction jobs, which commenced during 2020.

Project 1 Project 2
Contract Price 620,000 500,000
Cost incurred during 2020 240,000 280,000
Estimated cost to complete 120,000 40,000
Billed to customers during 2020 150,000 270,000
Received from customers during 2020 90,000 250,000
What amount of gross profit (loss) would Bell report in 2020 under the zero profit method and the
percentage-of-completion method?
8. Hansen Construction Inc. has consistently used the percentage-of-completion method of recognizing
income. During 2020 Hansen started work on a P 2,500,000 fixed price construction contract. The
accounting records disclosed the following data for the year ended December 31, 2020:
Cost Incurred P 930,000
Estimated Cost to Complete 2,270,000
Progress Billings 1,100,000
Collections 700,000

How much loss should Hansen have recognized in 2020?

9. Marr Construction Company has consistently used the percentage-of-completion method on January
10, 2020. Marr began work on a P 6,500,000 construction contract. At the inception date, the estimated
cost of construction was P 5,500,000. The following data relate to the progress of the contract:
Cost Incurred 01/10/2020 through 12/31/2021 3,500,000
Estimated cost to complete at 12/31/2021 1,500,000

How much income should Marr recognize for the year ended December 31, 2021?

10. Diaz Company entered into a construction agreement in 2020 for the rip-rapping of Pier 4. The original
contract price was P 10,000,000 but a change order was issued in 2021 increasing the contract price by
P 500,000. Diaz uses the percentage of completion method of revenue recognition on long-term
construction contracts. The following information’s are obtained on the project of 2020 and 2021.
2020 2021
Cost incurred to date P 4,900,000 P 8,740,000
Estimated Costs to complete 4,900,000 2,260,000
Billings made 5,280,000 3,520,000
Cash Collections 4,380,000 7,500,000
What is the gross profit (loss) of Diaz on the project for 2021?

11. Enrille’s construction is in its fourth year of business. Enrille performs long-term construction projects
especially in Agusan and accounts for them using the percentage of completion method. Enrille built an
apartment building at the price of P1,200,000. The costs and billings for this contract for the first three years

2019 2020 2021

Cost incurred to date 300,000 650,000 790,000
Estimated costs yet to be incurred 500,000 250,000 0
Customers billing to date 150,000 410,000 1,000,000
Collections of billings to date 120,000 340,000 950,000
Determine the income from construction in 2020?
11. Each of the coffee Beanery Company’s 21 new franchisees contracted to pay an initial franchise fee of
P 40,000. By December 31, 2019, each franchisee had paid a non-refundable P 20,000 fee and signed a
note to pay P 10,000 principal plus the market rate of interest on December 31, 2020, and December 31,
2021. Experience indicates that one franchise will default on the additional payments. Services for the
initial fee will be performed in 2019.
What amount of net unearned franchise fees would coffee Beanery report at December 31, 2019?
12. Dryers Inc. sell franchise for ice cream outlets in Metro Manila. One contract has been signed on January
5, 2020. The agreement calls for an initial franchise fee of P 5,000,000 to be paid by the franchisee at the
signing of the contract. The franchisor’s initial cost of services is P 2,000,000 to be incurred uniformly over
the six-month period prior to the scheduled opening date at July 15, 2020. No future payments are to be
made by the franchisee, although there will be continuing costs of P200,000 per year for services rendered
during the ten year term of the contract. The normal return for the franchisor on continuing operations
involving franchise outlets is 10%.
How much net income would be recognized by Dryers, Inc. on July 15, 2020?
13. On January 2, 2020, Pizza Inc. signed an agreement authorizing Ms. Janice to operate as a franchisee for
an initial franchise fee of P 6,000,000. Of this amount, P3,000,000 was received upon signing of the
agreement and the balance evidence by a 24% promissory note is due in three annual installments of
 P1,000,000 each beginning December 31, 2020. Ms. Janice started franchise operations on September 1,
2020 after Pizza, Inc. rendered initial services required at total costs of P1,000,000. The first installment was
collected on due date. The collectability of the note is not reasonably assured. Using the installment
method, what is the realized gross profit to be recognized on December 31, 2020?
14. On January 1, 2020, Magnolia Ice Cream signed an agreement authorizing Trisha to operate as franchise
for an initial franchise fee P1,000,000 received upon signing of the agreement. Trisha commenced
operations on August 1, 2020 at which date of all the initial services required of Magnolia ice Cream had
been performed at a cost of P200,000. The franchise agreement further provides that Trisha must pay a
10% monthly continuing franchising fee. Sales reported from August 1 to December 31, 2020 amounts to
P400,000.

What is the net income with franchise fee to be reported by Magnolia ice Cream in 2020?

15. On January 1, 2020, Red, White and Blue (the joint operators) jointly buy a helicopter for P 30 million cash.
The joint arrangement includes the following agreements:
a. The parties are the joint owners of the helicopter.
b. The helicopter is at the disposal of each party for 70 days each year.
c. The parties may decide to use the helicopter or lease it to a third party.
d. The maintenance and disposal of the helicopter require the unanimous consent of the parties.
e. The contractual arrangement is for the expected life (20 years) of the helicopter and can be
exchange only if the parties agree. The residual value of the helicopter is P2million.
f. Revenues and expenses are to be shared equally among the joint operators.

In 2020 the parties paid P 300,000 to meet the costs of maintaining the helicopter.

In 2020 each party also incurred costs of running the helicopter when they made use of the helicopter
(eg Red incurred costs of P 200,000 on pilot fees, aviation fuel and landing costs). In 2020 the parties
earned rental income of P2.5 million by renting the helicopter to others.

a. What is the net income (loss) of the joint arrangement on December 31, 2020?
b. What is the book value of the helicopter in the books of Red on December 31, 2020?
c. What is the share of White in the net income (loss) of the joint arrangement on December 31,
2020?

“Preparation is the best way to develop confidence. There is no better way in any battle than being prepared.”
Atty. Janet Abuel, CPA
1st Place- 1998 Bar Exam

God bless
Jolly Ann C. Kuan, CPA